Home Ownership in Canada Gets a Little Tougher

Affording a home in Canada got a little bit tougher in the second quarter of the year.

With home sales and housing starts rising and home prices edging higher in the past several months — bucking calls that Canada’s housing market is in a ‘cooling-off’ phase — the rate of home appreciation was sufficient to wear down the affordability of a single-family home a little, Royal Bank of Canada said in a report released Tuesday.

According to the bank, the housing affordability measure, or the cost of owning a home as a percentage of household income, rose by 0.3 percentage points to 42.7% for a detached bungalow in the second quarter from the prior quarter. For two story homes, it rose 0.4 percentage points to 48.4%. The housing affordability measure for condos in Canada was flat in the quarter at 27.9%.

Despite being slightly harder to afford a home, Canadians continue to be active in the housing market. Recent changes to the mortgage-backed securities guarantees announced by the government-backed Canada Mortgage and Housing Corporation are expected to have a “marginal effect on housing demand,” said Craig Wright, chief economist at RBC, and the lead author of the report.

“Barring another turn of the housing-policy screw by the federal government, home resales will stabilize near the recent not-too-hot, not-too-cold levels in the near term,” Mr. Wright said.

Not surprisingly, the biggest risk weighing on the Canadian housing market continues to be the threat of rising interest rates. Mr. Wright notes a “slim chance” that rates will hike soon, forecasting that the Bank of Canada might finally act on its key policy rate sometimes around mid-2014.

Some of Canada’s big banks have already started bumping mortgage-lending rates higher, with Bank of Montreal leading the pack last week when it raised its five-year fixed rate to 3.79% from 3.59%.

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Canada Real Time provides insight and analysis into what’s making news in Canada, a country punching above its weight on the world stage thanks to its vast resources and strong banking sector. Drawing on the expertise of The Wall Street Journal and Dow Jones Newswires, we take a look at developments in fields ranging from business to politics to culture. You can contact the editors at canadaeditors@dowjones.com